ASOP 18: Long-Term Care Insurance

Question 1

Section 1 - Purpose and Scope

Answer 1

1. Purpose – recommended practice to actuaries involved in designing, pricing, funding or evaluating liabilities for insurance contracts for Long-Term Care (LTC) products
2. Scope – applies to the following services (does not apply when LTC benefits may be immaterial feature of contract with other benefits):
   o Individual and Group LTC plans
   o LTC insurance as rider with other insurance/annuity products
   o Self-insured plans providing LTC

Question 2

Section 2 - Definitions

Answer 2

• Activities of Daily Living (ADLs) for LTC
• Bathing
• Continence
• Dressing
• Eating
• Toileting
• Transferring (between bed and chair)
• Cognitive Impairment – deficiency in: short term or long term memory, orientation, deductive or abstract reasoning, or judgement as it relates to safety awareness

Question 3

Section 3 - Analysis of Issues and Recommended Practices

1. Coverage and Plan Features
2. Assumption Setting
3. Premium Rate Recommendation
4. Reserve Determination
5. Sensitivity Testing
6. Cash Flow Testing
7. Experience Monitoring

Answer 3

1. Coverage and Plan Features
a. Actuary should take into account benefit eligibility, covered services, benefit amounts, benefit payment duration, and other coverages

b. LTC Plan Features that May Require Special Consideration
▪ Acceleration of Benefits – LTC benefits may be provided under a life insurance product. Assumptions for amount and timing of payments should be consistent

▪ Other Insurance Products – LTC benefits may be added to other insurance products. Methods and assumptions must be considered and should be appropriate

▪ Other Programs – may be provided by HMOs, PPOs and EPOs

▪ Retirement Communities – LTC may be provided for insureds living within retirement communities

2. Assumption Setting
a. Consider available experience data and reasonably foreseeable future changes in experience

b. Assumptions for LTC Coverage
▪ Morbidity
* Consistent with plan features and options, benefit eligibility, claims adjudication process, benefit amounts, limits and exclusions
* Actuary should establish claim incidence rates, claim termination rates and costs of eligible benefits
* Considerations for Setting Assumptions for Total Claims Costs in LTC
- Costs vary by nursing home, assisted living facility and home care
- Substitution effect among various benefits when more than one is available
- Induced demand due to the presence of LTC insurance
- Availability of benefits from other public and private programs
- Availability of LTC services
- Effect of selection and classification of applicants
- Financial benefit to claimant of remaining eligible for benefits
- Effect of mortality on termination rates
* Should consider the underwriting and claim processes being utilized

▪ Mortality
* Consider effects of selection and classification and use table that reflects the expected mortality of the insureds

▪ Voluntary Termination (Lapse)
* Critical to the estimation of costs and evaluation of liabilities
- Higher lapse = lower costs
* Consider method of marketing, competitiveness, premium mode, payment method, nonforfeiture benefits, etc

▪ Expense
* Consider cost of product development, marketing, producer compensation, regulatory compliance, underwriting, issue, policyholder service and claim administration

▪ Tax
* Reflect tax reserve basis of plan and premium, income or other taxes

▪ Investment Return
* Important for level-premium issue age products

▪ Mix-of-Business
* If financial results could be materially affected by mix of business
* Considerations such as age, gender, marital status, underwriting classes, distribution system, and plan options

▪ Change Over Time
* LTC plan will be in force for a long period of time
* Identify assumptions that may change materially over that time

3. Premium Rate Recommendations
a. Must conform with statutory requirements, including loss ratios

b. Use realistic, not too optimistic assumptions

c. Must not rely on anticipated future premium rate increases

4. Reserve Determination
a. Typically require premium reserves, contract reserves and claim reserves for reported claims and IBNR claims
b. May use similar methods as with health coverages

5. Sensitivity Testing
a. Sensitivity tests of reasonable variations in assumptions

6. Cash Flow Testing
a. Important due to long-term nature of LTC benefits
b. Should test future liability cash flows under different scenarios

7. Experience Monitoring
a. Inform sponsor that experience data should be collected, so the actuary can compare prior assumptions with emerging experience

Question 4

Section 4 - Communications and Disclosures

Answer 4

1. Documentation
a. All assumptions subject to review and update on regular basis
b. Document assumptions, processes used and general sources of data
▪ Sufficient detail such that another actuary could use the documentation where appropriate
c. Refer to ASOP23 (Data Quality), ASOP 25(Credibility Procedures) and ASOP 31(Ratemaking Documentation)

2. Disclosure
a. Disclose the sensitivity of the work to reasonable variation
b. Available to client or employer and made available to other persons when client or employer requests it

3. Prescribed Statement of Actuarial Opinion
a. Not required

4. Deviation from Standard
a. Actuary must be prepared to justify any procedures that depart materially from these standards