Eaton-Combination Products: An Accelerated Education Flashcards
Market
- Challenges in stand-alone LTC market
- Consumers feel rising premiums (consumers thought it would be level premiums)
- Insurers strengthen reserves and increase premiums - Combined products to address this - life and health
- Health portion = supplemental medical, LTC or critical illness coverage - “Combo”/”Hybrid” products increasingly chosen over stand-alone LTC
- Consumers dislike “use it or lose” nature of stand-alone products (if you dont use LTC, you lose the value of the product)
- With combo products, you receive some benefit (life) even if you don’t use the health benefits - Agents find it easier to sell combo products than stand-alone
- Many combo products sold as single premium policies (high up-front price tag)
- Typically have rate guarantees
Benefits (in Addition to Life Benefit)
- Indemnity and Reimbursement Model
a. Indemnify policyholders for specific amount or reimburse for chronic illness or LTC costs
- E.g. up to $5,000 per month
b. Life policy with chronic illness may give policyholder benefit by accelerating 4% of available death benefit each month - Acceleration, Restoration and Extension of Benefits
a. Accelerated benefit riders - most common combo products
- Advance all or part of policyholder’s death benefit for chronic, critical or terminal illness
- Acceleration may be limited to a max % of total face amount (e.g. 75%) or dollar amount (e.g. $250,000)
b. Extension - may extend health benefit beyond the acceleration and restoration of benefits amounts to longer benefit periods
- Greater risk than acceleration only policies
- Policyholders purchasing this may have higher health risks (anti-selection)
- Actuarial Pricing - consider portion of overall benefits expected to be paid for Life and Nonlife, as well as profile of policyholder
Regulatory Framework and Guidance
- NAIC Accelerated Benefits Model Regulation (620) [AB Model Regulation]
a. Guidance that allows accelerated benefits (including chronic illness) to be added to life products
- Requirements:
(1) Obtain signed acknowledgement of concurrence for payout
(2) Certain payment criteria
(3) General disclosures
b. Guidance on actuarial standards, disclosures and reserves
c. Actuarial memorandum should accompany each filing
d. Regulation doesn’t govern LTC accelerated benefits
- NAIC Long-Term Care Model Regulation (640)
a. Applies to LTC and life policies that accelerate LTC benefits
- Exceptions to stand-alone LTC rules that apply to accelerated LTC benefits: (i.e. they do apply to LTC but not to accelerated LTC)
(1) Disclosure of tax consequences
(2) Requirement to offer inflation protection
(3) Reserve standards
(4) Actuarial memoranda - IIPRC Additional Standards for Accelerated Death Benefits
a. August 2014 (amended earlier 2007 rules)
b. Riders filed under accelerated death benefits can’t be marketed as LTC
c. Potential benefit triggers for accelerated death benefit are more diverse than for stand-alone LTC
- Qualifying events based on ADLs or cognitive impairment [both true for LTC], OR qualifying event for terminal illness or various condition-based diagnoses
d. Guidance for benefit amount, benefit design options, effect of benefit payments on other benefit provisions, exclusions and restrictions, expense charges, incontestability, payment options, payment procedures, qualifying events, reinstatements and termination
e. Incidental Value Test - qualified actuary must certify PC of rider shouldn’t add more than 10% to expected policy benefits
- PV(rider) < 10% x PV(base)
f. Actuary must also certify that premiums (or cost of insurance charges) are less than 10% of thsoe of base policy
Pricing
Accelerated death benefit riders-most popular forms of nonlife coverage
Reinsurance on combo products is common
**1. Policyholder Behavior **
a. Purchasers of combo policies will not behave like purchasers of stand-alone LTC
- Traditional LTC policies don’t carry cash value (use it or lose it); Few exceptions to use it or lose it (e.g. return of premium rider)
- Combo product has guaranteed life benefit
b. Accelerated benefit combo product - small value relative to base life policy
c. Policyholders under some designs pay no explicit premium for riders
- Policyholders don’t view the chronic illness or LTC benefit in same way as traditional LTC policy
2. Financing (of Accelerated Benefits)
a. Explicit Premium
- Premium rates per unit of face amount; called “Dollar for Dollar” method; Policyholder gets 100% of accelerated benefit elected and death benefit reduced by same amount
- Actuary certifies that rider premiums <10% of value of base premiums
b. Actuarial Present Value Method
- Discount accelerated benefit payment (instead of changing explicit premium) - Accounts for time value of money that company forgoes by providing death benefit early
- Actuary determines discount factors - Factors vary by age at claim, sex, smoking, etc
- Some companies use underwriting at the time of the claim; determine discount factor based on life expectancy at that point
- Advantage - policyholder likes zero-dollar premium
- Disadvantage - Policyholder may not understand that policy at time of acceleration and will be conufsed when value of benefit is discounted
c. Lien Method
- Assess lien on the policy at time of claim
- Policyholder pays interest on lien (subject to max interest rate)
3. Impact on Policy Values
a. Accelerating portion of face amount affects the base life policy
- Policy form and actuarial memo will specify the impact on: base policy cash value, policy loans, remaining face amount, net amount at risk, and other factors
b. Policy values typically reduced pro rata - i.e. 25% acceleration will decrease policy’s cash value by 25%
c. Portion of acceleration may be used to pay back an outstanding loan
d. Base policy premium could be reduced (when using present value method)
e. Lien method - do not impact policy values; booked as an admitted asset
4. Modeling
a. Ideally use same model as base life policy to price combo products
- Health benefit should be included in calculation of net income
b. If reserves are needed, health reserves may be modeled alongside life reserves
5. Mortality
a. Estimate mortality separately for active and disabled lives
b. Explicit Assumptions about the following items for Mortality considerations:
- Conservation of mortality - if health benefit won’t materially affect overall mortality.
(1) First estimate disabled mortality
(2) Estimate future mix of active/disabled
(3) Calculate resulting active mortality so total mortality of base policy is conserved
- Adjustment to mortality
(1) Scalar factor applied to base mortality
(2) Same disabled/active balancing approach as above - Disabled life mortality
(1) Using appropriate data - such as LTC continuance tables with terminations from death and recovery - make adjustments to continuance tables - Mix of active and disabled lives
(1) Based on estimate of incidence of triggering health benefit
(2) For long period benefits - assumption for recovery of some disableds - Complex multistate modeling - may want to use simplifying assumptions - Accelerated death benefits usually lump-sum accelerations
(1) if only portion of face amount is accelerated, should still consider the entire life to be disabled to model mortality
6. Expenses
a. Combo riders - usually ancillary to sale of base policy
- Therefore mostly marginal expenses; expressed as portion of premium
- Company may charge acquisition cost (one-time expense)
b. Health claim expenses may be relatively high because companies don’t have experience in paying these products
c. Companies may charge administrative fee
7. Premiums
a. Target company’s internal profit metric for combos with explicit premiums
- Internal rate of return, profit margin (% of premium), or internal hurdle rates
b. Rates filed as individual non-LTC accident and health benefits (as opposed to only accelerated death benefits) - develop premiums that meet minimum loss ratio requirements
c. Acceleration riders that qualify as LTC coverage - subject to LTC Model Regulation
8. Synergies and Natural Hedges
a. Stand-alone LTC - claims paid in later durations supported by premiums paid early on (i.e. “lapse-supported”)
- Higher than expected policy termination - financially favorable to company AFTER expenses are recouped
b. Level premium combo products - health claims may be substantially higher at old ages
- If mortality and voluntary lapse higher than expected on base life policy, LTC or chronic illness experience will be more favorable
- Creates natural hedge between life and health products
c. Hedge in scenario where persistency is greater than expected
- Increase in earnings on underlying life policy
Underwriting
- Additional risk of adding health riders
- Companies with full underwriting on base life policy
- Additional application questions and detailed medical history for combo application - The larger the health benefit in relation to life benefit, the stronger the health underwriting should be
- Companies with small health riders may do more limited underwriting approach; one or two “knockout” questions in simplified underwriting application - If zero premium for rider (i.e. using PV method or lien), may be lower risk of anti-selection
Reserving
Reserve requirements depend on how product is financed and whether benefit is more substantial than accelerating the death benefit
1. Active Life Reserves
a. Depend on extent to which benefit is prefunded
b. Many accelerated death benefits don’t have accompanying level premium or charge to prefund the benefit
- Minimal explicit active life reserve
c. Independent extension of benefits rider
- Does have prefunding component
- Requires active life reserve
2. Claim Reserves
a. Claim reserve needed once policyholder goes on claim for acceleration benefit
b. May be offset by reduction in expected value of future death benefits
Marketing
- Companies without combo product may not be presented to customer at time of sale
- Even though health rider isn’t usually a tipping point in the decision to buy life product - LTC or chronic illness combos
- Must decide if policy will be tax-qualified LTC product or chronic illness
- If LTC, then subject to LTC Model Regulation
(1) Model Regulation includes certain exceptions for acclerated benefit LTC riders for life policies - e.g. Inflation protection not required
(2) Compliance may be difficult if company doesn’t have experience
Conclusion
- Life and health combo products around for many years
- Dwindling sales in stand-alone LTC - lead to more life companies offering combo products
- Combo product still in its infancy
- Substantial sales and experience continue to emerge
