How to Spot a High-Level Bloom Question and Successfully Answer It

by Steve Armstrong, Examination Committee Chair, Guest Writer and Elie Bochner, ACAS, Candidate Liaison Committee

Over the last several years, the CAS has gradually adjusted the upper-level exams to test the actuarial student’s knowledge at higher cognitive levels. One way to distinguish a higher-level Bloom’s question is that its answer cannot be succinctly captured on a notecard. In the past, committing to memory all the lists, definitions, calculations, and techniques previously tested was a good strategy for success. Today that is only part of the exam-success equation. The successful candidate must also synthesize multiple ideas and apply concepts in unusual situations not necessarily directly covered in the syllabus readings.

So how can candidates get a better handle on the more challenging exam questions? Study the syllabus readings, and don’t rely solely on past exams and seminar materials. Exam writers craft questions from the Learning Objectives, some of which are more open-ended than others. These are the fertile soil where Bloom’s questions can grow. Work with study buddies to invent your own questions and challenge each other to transcend the prescriptive parts of the syllabus. Come exam day, point values will help you gauge the depth of response needed for full credit. However not all high-level Bloom’s questions demand a high number of points or length answers. They may instead require creative but simple insights.

As always, candidates should pay close attention to the wording of the question. Prompts like “recommend,” “justify,” “propose,” “suggest,” “fully discuss,” and “compare and contrast” ask the candidate to apply rather than regurgitate the knowledge gleaned from the syllabus. Even seemingly straightforward prompts like “calculate” can show up a high-level question if the calculation is not demonstrated step-by-step in the syllabus readings.

The 2013 Spring Part 5 Exam, “Basic Techniques for Ratemaking and Estimating Claim Liabilities,” offers a few good examples.

Question #5 is a four-point question that provides a series of data and asks the candidate to “Calculate the indicated rate change.” The first bit of high-level reasoning required is to understand the data and its limitations before jumping into answering the question. It also combines elements of ratemaking and reserving, something candidates can expect to see more frequently now that Part 5 is no longer separated into a reserving half and ratemaking half. The point value also suggests that significant work is needed to receive full credit. A successful response correctly assembles the building blocks, calculates an indicated rate change, and explains any assumptions made.

Question #11b asks the candidate to “…recommend and justify which rating variable the insurer should implement within a risk classification system” without performing any calculations. The point value of 0.75 hints that three items (each worth 0.25 points) are needed for a solid justification. This can be accomplished in three brief sentences.

Question #18e exemplifies how a simple question can still demand higher-level thinking. It asks the candidate to “Compare and contrast the Cape Cod method and Bornhuetter-Ferguson method by providing one similarity and one difference,” and it is worth 0.5 points. The answer is not something typical candidates would have codified in their notecards, yet the question covers two common techniques that candidates are no doubt very familiar with individually. Comparing and contrasting the two, however, goes beyond mere memorization of the syllabus. Two sentences, one for the similarity and the other for the difference, are all that is needed to ace this high-level Bloom’s problem.

Part 5, Fall 2013, Question 12 tested at the highest level of Bloom’s taxonomy:

12.     (2 points)

An insurance company has recently entered a new state and plans to invest heavily on marketing in an attempt to aggressively grow its homeowners book of business. Relative to the low initial premium in the state, these marketing expenses will be significant.

The company’s senior management proposes that the actuary develop a rate level where the expense provisions reflect only the typical variable costs. Construct a thorough argument in support of this proposal.

While a candidate need only discuss one consideration to receive full credit, a wide array of considerations could be chosen. Take a look at the sidebar below for an excerpt from the exam rubric to see the variety of responses a highest-level Bloom’s question elicits.

Rubric, Exam 5, Question 12

Grading

Grading was performed according to the following guidelines, with multiple considerations required to merit a full two-point grade.

  • A thorough discussion of one consideration yields 1 point.
  • A discussion of one considerations yields 0.5 points   
  • A listing of one valid consideration with limited clarity or no discussion (and thus limited clarity as to what was meant) may yield 0.25 points.

Considerations

Lifetime Value Analysis (including Asset Share Pricing Model or Cost Benefit Analysis) – as the book grows and renewals persist, loss ratios on renewals should be lower and the fixed expense cost will be spread among a larger book premium volume resulting in profitability to the company. The cost of not charging for fixed expenses could have a positive NPV over a reasonable time horizon. No credit for the argument for a “pure bait and switch,” where policyholders are enticed in with low rates and then given big rate increases upon renewal.

Competitive position – including the fixed expense in the rates may result in uncompetitive rates. High rates may also lead to adverse selecting and unprofitable business.

Overall rate level for the product – including the marketing expenses should not be included as it will make the rate level for the product unaffordable.

One-time expense – rates are established for future periods of time. The marketing expense is a one-time cost, and will expire while the rates are still in effect. Including this expense will result in rates that are too high.

Statement of Principles –

  • Principle 1: A rate is an estimate of the expected value of future costs.
  • Principle 2: A rate provides for all costs associated with the transfer of risk.
  • Principle 3: A rate provides for the costs associated with an individual risk transfer
  • Principle 4: A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer

Retention – the front-end investment is expected to pay off in the long run. This is expected to result in a broad customer base and/or customers that are fairly inelastic, thus justifying the heavy investment in growth.

Regulatory environment – if the rates include the marketing expense, they may need to be reduced in the future. There will be additional expense and time associated with having to re-file. Alternatively, would regulators approve the somewhat higher rates resulting from inclusion of the fixed expenses?

Extreme case – no company would build in the entirety of a fixed expense load on a very small (i.e., single-policy) book of business. The actuary can work towards a rate that is an estimate of the expected value of future costs, but consider those costs over a longer time horizon, or perhaps over a broader base, allowing other states to subsidize the expense of management’s proposal.

Company Investment – similar to the last two points, the argument can be made that the company investment in marketing should not be borne by the policyholders (essentially, this should be passed to the investors).

Note 1: Responses that indicate a pure subsidization (charge less here but make up for it by charging more elsewhere) will not be considered valid, but the argument that this marketing will help with other products in other regions will be considered valid.

Note 2: There should not be any penalty for candidates who consider the marketing expense to be a variable expense and the large marketing expense discussed in the problem as an atypical variable expense.

In summary, each of the upper level exams will continue to evolve towards higher-level Bloom’s questions. Master the exam material by studying the Learning Objectives and mastering the content beyond what is prescribed in the readings. On the exam, be aware of prompts that may justify unique arguments or insights from multiple sources of data. Additionally, continue to use the point values as guides to how much to write for any given response.