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CEBS GBA EXAM 1 QUESTIONS AND ANSWERS
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CEBS GBA EXAM 1 QUESTIONS AND ANSWERS
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CEBS GBA EXAM 1 QUESTIONS AND ANSWERSBroad view of Employee Benefits (Mod 1.1) - answer- Considers Employee Benefits to
be virtually any form of compensation other than direct wages paid to Employees (Ex:
WC, Unemployment, State DI, SS, Vacation, Holidays, 401K/Retirement, Employer
share of Medical, Severance Pay, Child Care, etc..)
Narrow view of Employee Benefits (Mod 1.1) - answer- Any type of plan sponsored or
initiated by Employees and Employers and engaged in providing benefits that result
from the employment relationship and that are not underwritten or paid directly by the
government; (Ex: Benefits excluded include those legally mandated - WC, SS).
Impact of Labor Unions on Employee Benefits (Mod 1.2) - answer- Through Collective
Bargaining, Employee Benefit Plans have been impacted. In 1948 ruling states that the
duty to bargain in good faith over wages also included insurance and fringes (pension).
In WW Cross & Co, NLRB ruled wages included health and accident plan.
What is the Taft-Hartley Act? (Mod 1.2) - answer- The Labor Management Relations Act
of 1947 is a United States federal law that restricts the activities and power of labor
unions. This set forth good-faith collective bargaining over wages, hours, terms of
employment and benefits.
3 Examples of Tax Advantages of Employee Benefit Plans (Mod 1.2) - answer- 1:
Employer Contributions are Tax Deductible
2: Employer Contributions are not considered income to Employees
3: Certain Retirement Benefits Accumulate Tax-Free until distributed.
Impact of making a plan Contributory on Employee Participation (Mod 1.5) - answer-
Impacts group as a whole - not everyone will elect due to cost. If participation is
mandatory in a contributory plan, may create employee relations problem.
Describe arguments of flexibility in designing employee benefit plans as it relates to
functional approach (Mod 1.5) - answer- Argument 1: More flexibility EE has, more likely
he or she will select a benefit that best meets needs/goals - thus, flexibility in plan
design/options facilitates functional approach.
Argument 2: Works against functional approach because some EE's may not recognize
all their needs and leave some uncovered.
Define concept of risk (Mod 2.1) - answer- Uncertainty with respect to possible losses.
Inability to determine with certainty the actual number and value of claims.
Define relationship between peril and hazard (Mod 2.1) - answer- Peril: Cause of a loss
(fires, floods, theft, death)
Hazard: Condition that increases probability that a peril will occur or tends to increase
severity of loss when a peril occurs.
,Define physical hazard, moral hazard, morale hazard (Mod 2.1) - answer- Physical:
Physical Condition (Defective Wiring, No Fire Extinguisher), increases chance of loss
Moral: Dishonesty increases chance of loss (Arson)...b/c of Moral, premiums are higher
to all. Attempt to control by careful UW and provisions such as deductibles, waiting
periods, exclusions
Morale: Carelessness or Indifference by insureds since they have insurance (protected
from loss).
How does pure risk differ from speculative risk (Mod 2.2) - answer- Pure Risk:
Situations where two alternatives are possible - risk will happen (no loss) or it will
happen and a financial loss takes place. Many EB Coverages fall into this classification.
Nothing positive can result from Pure Risk, but many are insured (Fire, Auto, Illness,
Disability)
Speculative Risk: Involve a possibility (that is not present in pure risk) of a gain. Three
potential outcomes: Loss, No Loss, Gain (Ex: Purchase Stock, Gambling)
Most Important Type of Pure Risk (Mod 2.2) - answer- Personal Risk (Death, Illness, DI,
Unemployment)
Summarize Methods for Handling Risk (Mod 2.2) - answer- 1: Avoidance - does not
take on risk/gets rid of
2: Control - attempts to prevent or reduce the probability/severity of a loss taking place
3: Retention - risk is assumed and paid for by the person suffering the loss
4: Transfer - one shifts the financial burden of risk to another party
5: Insurance - form of transfer which the financial burden is transferred to insurance
company
Examples of Questions that should be addressed when creating benefit objectives (Mod
1.3) - answer- Ex: What benefits should be provided? Who should be covered? Should
Employees have options? How should plan be financed? How should plan be
administered? How should plan be communicated to Employees?
What is the Functional Approach to Employee Benefit Planning? (Mod 1.4) - answer-
Application of a systematic method of analysis to an Employer's Total Employee
Benefits Program. It analyzes the organization's EBP as a whole in terms of its ability to
meet various employee's needs and to manage loss exposures within the overall
compensation goals and parameters.
Why is the Functional Approach appropriate when planning, designing and
administering Employee Benefits? (Mod 1.4) - answer- 1: EE Benefits Significant
Element of EE Comp and are a Tax-Effective Way to Compensate
2: EE Benefit Represent Large Labor Cost, so ER's should effectively plan/cost-control
3: In the past, EE Benefits were adopted on piece-meal basis; helps to now fill
gaps/overlap
,4: Systematic Approach to planning helps to keep the EBP current, competitive and in
compliance with updated requirements (ACA)
5: Benefits to be integrated properly together
Compare Compensation/Service Oriented Benefit Philosophy with the Needs-Oriented
(Mod 1.4) - answer- Compensation/Service: EBP comprised of primarily compensation,
service or both. Level of benefits tied to salary or pay levels/years of service
Needs Orientated: Focuses on Needs of EE's and their dependents
Identify Steps in Applying Functional Approach (Mod 1.4) - answer- 1: Classify EE/Dep
Needs & Objectives (in logical/functional categories)
2: Classify Categories of EE's to be protected
3: Analyze present benefits in terms of functional categories of needs/objectives,
persons to benefit, and regulatory requirements
4: Determine any gaps or overlap in benefits from all sources in terms of functional
categories of needs & the persons to be protected
5: Consider recommendations for changes
6: Estimate costs/savings from each recommendation
7: Evaluate alternative methods of financing for those recommended benefits (and
existing ben)
8: Consider other cost-saving techniques
9: Decide upon appropriate benefits and methods of financing as a result of analysis
10: Implement Changes
11: Communication Changes to Employees
12: Periodically re-evaluate EBP
Define Needs/Exposures covered under EBP (Mod 1.4) - answer- 1: Medical Expenses
(EE/Dep)
2: Losses due to Disability (Short/Long Term)
3: Death (EE/Dep/Retirees)
4: Retirement Needs
5: Capital Accumulation Needs/Goals
6: Needs for Unemployment/Layoff/Termination
7: Needs for Financial/Retirement Counseling
8: Losses from property/liability exposures
9: Needs for Dependent Care Assistance
10: Needs for Educational Assistance (EE/Dep)
11: Needs for Custodial-Care Expenses (LTC)
12: Other Needs/Goals (Stock Purchase Plan)
Explain Concept of Replacement Ratio in terms of creating Retirement/Disability Plans
(Mod 1.5) - answer- A Replacement Ratio is a person's gross income after retirement,
divided by his or her gross income before retirement. Should include SS, capital
accumulation benefits as well as retirement plans.
, Define Protection-Oriented Benefits (Mod 1.5) - answer- Consist of Medical Expense
Benefits, Life/STD/LTD Insurance - protect against serious loss exposures that could
spell immediate financial disaster. As such, they have a relatively short probationary
period due to the need of immediate coverage.
Define Accumulation-Orientated Benefits (Mod 1.5) - answer- Consist of Pension Plans,
Profit-Sharing, Savings, 401K, etc...which reward an Employee for long service with an
Employer. Involve a longer probationary period since viewed as a reward - not a
disadvantage for long-term employees.
How is insurance a mechanism for EBP's? (Mod 2.3) - answer- Insured (EE/ER) pays
money (premium) into a fund (insurance company). Upon occurrence of loss,
reimbursement is provided to person suffering loss. Thus, risk has been
reduced/eliminated and all who paid into the fund share the resulting loss.
Compare insurance mechanism to gambling (Mod 2.3) - answer- Insurance is a
mechanism to handling existing risk - gambling creates risk where one did not
previously exist. Risk caused by gambling is 100% speculative, while insurance deals
with pure risk. Gambling involves a gain for one party while insurance is a mutual
sharing of any losses. The loser in the gambling transaction remains in a negative
situation while the insured is financially restored in whole or part to prior condition.
Define Indemnification (Mod 2.3) - answer- Principle of making the insured whole again
after reimbursement for covered loss takes place - similar financial situation than prior to
claim.
Which risk handling technique is mutually exclusive (Mod 2.3) - answer- Avoidance -
when you avoid a risk, you have no losses so there is no need for other techniques
State advantages/disadvantages of using insurance to fund an EBP (Mod 2.3) - answer-
Advantages:
-Known Premiums (Budgeting)
-Outside Administration (Handled by Insurance)
-Financial Backing
-Cost Management (Design Plans to limit cost)
-Economy (Insurance more efficient/lower cost)
Disadvantages:
-Possible Additional Costs (Admin, Comm, Overhead, Premium Taxes)
-Employee Satisfaction (Slow, Claim Denials)
Describe characteristics of ideal insurable risk (Mod 2.3) - answer- 1: Must be large
number of similar risks (law of large numbers)
2: Loss should be verifiable and measurable
3: Loss should not be catastrophic in nature
4: Chance of loss subject to calculation (avg frequency/severity) - adequate premium
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