Insuring Long-Term Care Chap 7: LTC Premium Rate Increases Flashcards
Introduction
- Regulatory and Actuarial Factors to be considered when Preparing LTC Rate Increase Filing
1. Morbidity, persistency and interest assumptions deteriorated – led to underpriced blocks of LTC business
o Carriers turned to filing rate increases to correct this underpricing
2. Regulatory and Actuarial Factors to be Considered When Preparing LTC Rate Increase Filing
o Monitoring Experience and Developing Projections
o Why Rate Increases are Needed
o Governing Regulations
o Rate Increase Filing Strategy and Components
Monitoring Experience and Developing Projections
1. Monitoring is crucial to adjusting assumptions and developing future expectations for LTC block
2. Timely identification of deviations in assumptions can reduce size of rate increase needed and make a smoother experience for policyholders and with regulators
- May take several years to get enough credible experience to confirm adverse deviation
- Difficult to balance early monitoring with amount of time it takes to get credible experience
3. Long-tail LTC experience – should be evaluated on a lifetime basis
- Durational and calendar year loss ratios will vary drastically
▪ Historical experience compared to pricing expectations may provide misleading results
- Assumed future experience must be projected over entire life of block (may be beyond 70 yrs)
- In early years, block is especially sensitive to persistency, morbidity and interest rate assumptions
- When experience isn’t fully available, industry data and trends can be useful
4. Historical favorable experience relative to expectations may not be indicative of future experience
- E.g. morbidity may be better than expected, but actual lapses are less than expected
▪ Early years – low loss ratios with higher premium payments and less claims
▪ Later years – more insureds than expected, and they start requiring LTC benefits. Claim costs per member may be lower, but total members may be higher than expected
- Early years – low claims and (relatively) high level premiums
- Prefund claims incurred at later ages
- As block ages, collected premiums decrease due to terminations and waived premiums as policyholders go on claim
▪ Claim costs escalate at the same time
- Active Life Reserves (ALR) – premiums collected above current claims used to fund ALR
▪ Accumulated in early durations and released in later durations
- Early years – premiums exceed claims
- Later years – claims exceed premiums
▪ Aggregate effect of ALR on loss ratio is zero (lifetime change in ALR is zero), so it is generally excluded from experience in rate filings
Why Rate Increases are Needed
- LTC Assumption
- Interest Rate
- Voluntary Lapses
- Morbidity
- Mortality
1. Relatively new product (uncommon before mid 1980s)
a. Priced in accordance with experience and assumptions from adjacent industries and products
b. Guaranteed renewable with level premiums – varied by age at issue and underwriting classes
c. Relied on high interest rates, significant policy lapsation and steady rates of mortality
d. Very sensitive to long-term trends
▪ Investment rates, voluntary lapse and mortality
2. Late 1990s and early 2000s – newer products tried to take advantage of data on changing environment
a. New assumptions: Newer mortality tables, Lower interest rates, Low lapse experience
b. Still ended up being underpriced
▪ Morbidity (especially older ages) developed unfavorably
▪ Average length of claim longer than expected
▪ Incidence and utilization rates inconsistent with expectations
3. Favorable and unfavorable experience varied by policy benefit and demographics * Late 2000s and early 2010s – more experience
a. Priced using much lower voluntary lapse and interest rates
▪ Any needed rate increases likely due to mortality and morbidity rather than lapse or interest rates
b. Mortality has continued to be lower and morbidity higher than expectations
▪ Especially true for morbidity at later attained ages
4. LTC Assumptions
a. Mortality
▪ Life expectancy increased in last half century
▪ Early LTC products used mortality tables from 1960s and 1970s
▪ Improvements particularly in later years – members more likely to live long enough to use LTC services
▪ Early pricing didn’t consider improvements in mortality
b. Voluntary Lapses
▪ Lapsation assumed to be much higher (in line with Medicare Supplement policies)
▪ Policyholders valued policies more than assumed
- Assumed a meaningful number would pay premiums for a short time and then lapse before receiving benefits
▪ Actual lapse rates close to 1% or lower – assumed to be 5% or more
c. Interest Rates
▪ Late 1980s and early 1990s – rates had come down, but still quite high relative to today’s environment (2022)
* Policies priced with 6-8% interest rates
- Helped assumed premiums grow to cover future claim payments
▪ Current environment uses rates closer to 4%
▪ Recessions in 2000, 2008 and 2020
▪ Assets in ALR haven’t grown fast enough to meet coming demand of claims
d. Morbidity
▪ Largest unknowns when LTC first priced
- Both overall claim costs and granular assumptions (incidence, disabled mortality,
claim recovery, etc)
- Relied on population data (e.g. national nursing home surveys)
▪ Number of policies receiving benefits much higher than expected (higher persistency)
▪ Recently, more data is available
- Expected costs vary greatly by policy-specific benefits
5. Rate Increases
a. Early to mid 2000s – realized policies much more costly than expected
b. Rate increases – only way to reprice on guaranteed renewable policies
▪ Premium rates would need to increase significantly
c. Many insurers used similar assumptions and pricing methods – majority of industry needed to correct this
d. Regulators (Dept. of Insurance) – had to balance ability and willingness of policyholders to pay increased premiums with solvency needs of carriers
▪ Balance insurer revenue needs and burden on policyholders
c. Steps have been made to unify review methods
▪ 2021 – NAIC – intention to develop Multi-State Rate Review Framework
* Provide consistent national approach for reviewing LTC rates
* Timely approval of actuarially appropriate increases
* Eliminate cross-jurisdiction rate subsidization (from one area to another to cover extra costs in one region)
Governing Regulations
1. Two main regulations governing LTC rate increases:
- Loss Ratio and Rate Stability
- Applicable regulation depends on when and where policy is issued – can result in more than one regulation being applicable to block of LTC
▪ Most jurisdictions regulate all LTC rates, but some only regulate individual LTC premium rates
2. Loss Ratio
a. Benefits must be reasonable in relation to premiums
b. Section 19 of 2017 NAIC LTC Model Regulation
c. Adopted in almost all jurisdictions
d. Applicable to policies issued prior to rate stability regulations
e. Minimum loss ratio 60% in most jurisdictions (a few are different)
f. Expected Loss Ratio Considerations:
▪ Credibility of incurred claims and earned premiums
▪ Period for which rates are computed
▪ Experienced and projected trends
▪ Concentration of experience in early policy duration
▪ Expected claim fluctuation
▪ Experience refunds, adjustment or dividends
▪ Renewability features
▪ Appropriate expense factors
▪ Interest
▪ Experimental nature of coverage
▪ Policy reserves
▪ Mix of business (by risk classification)
▪ Product features (long elimination period, high deductible, high max limits)
g. Additional Requirements (issued in late 2013 – but only adopted by a few jurisdictions)
▪ All present and accumulated values must use maximum valuation interest rate for contract reserves when looking at rate increases
▪ Three year guarantee period or phase-in of rate increase
▪ Expanded eligibility for contingent nonforfeiture benefits
▪ Added policyholder notification requirements for rate increases
▪ Demonstrating compliance with new dual loss ratio test
3. Rate Stability
a. To minimize frequency and magnitude of rate increases
b. Adopted by many jurisdictions in early 2000s (NY still has not adopted it, along with a few others)
c. Section 20 of Model Regulation
d. Insurers required to certify that rates will remain stable under moderately adverse conditions
▪ Rate increase request must demonstrate experience more than moderately adverse
e. Limited how much of additional premium in rate increase can go towards expenses and profit by requiring higher loss ratio for additional premium
f. 58%.85% Test
▪ SUM (AV of incurred claims and PV Future Claims) not less than:
- (AV of Initial Premium and PV of Future Premium) x 58% PLUS
- (AV of Prior Premium Increases and PV of future Premium Increases) x 85%
▪ Section 20.1 Model Regulation update (2014)
- Use greater of 58% and original pricing loss ratio in test above
- Historical Incurred claims capped at expected level
- Note - Few jurisdictions have adopted this section
4. Contingent Nonforfeiture
a. Many jurisdictions require this
b. Minimum level of LTC provided for policies that lapse as result of rate increase (without requiring any additional premiums)
c. Benefit = sum of premiums paid
d. Section 28 of Model Regulation
e. Available if:
▪ Policy issued during eligibility window
▪ Cumulative rate increase exceeds a certain threshold (varies by issue age and premium payment term)
▪ Policy lapses within 120 days of increased premium due date
f. 2013 NAIC bulletin – lowered cumulative rate increase thresholds based on length of policy being in-force (very few jurisdictions adopted this)
g. Many insurers offer this benefit (regardless of issue age, cumulative increase level, etc)
5. Interstate Compact
a. Interstate Insurance Product Regulation Compact (IIPRC or Compact)
▪ To streamline original pricing and rate increase filings
▪ Allows insurer to submit single filing complying with one set of standards and be approved in all jurisdictions
b. Requirements for LTC rate increases to be filed through Compact
▪ Policy form originally filed through Compact
▪ Rate increase request 15% or less
▪ Certification that rates remain stable under moderately adverse experience after rate increase
c. Increases > 15% or without certification against adverse experience – need to be filed separately in each jurisdiction
d. Opt outs – some jurisdictions opted out of Compact, so all LTC rate increases must be filed with that jurisdiction
▪ 46 jurisdictions participate in Compact; 8 opted out of LTC rate increase provisions (at time of writing)
6. Other Restrictions
a. Rate Increase Caps
▪ Limit magnitude of rate increases
▪ Written in regulation or imposed by departments of insurance
▪ May allow for larger increase than the cap, but phased-in over multiple years
▪ Can cause significant delay for insurers to achieve desired rate level
b. Rate Increase Justification Methods
▪ To measure whether historical losses are being recouped by rate increase requests
▪ “If Knew” Premium Approach
* Restate historical experience to assume proposed rate level was charged from inception
* NAIC Health Actuarial Task Force (HATF) – said unrealistic – no chance for insurer to have knowledge at time of pricing, and expands risk of product
- Proposed alternate method that caps historical incurred claims at original pricing expected level
* Not adopted by most jurisdictions
▪ Prospective Present Value Method (PPV or Texas Method)
▪ Blended If-Knew/Make-Up Approach (Minnesota Approach)
c Assumption Deviations
▪ Limits on type and/or magnitude of assumption changes for rate increase
- Small number of jurisdictions prohibit interest rate changes used to justify increases
- Even small number limir rate increases driven by other assumptions such as lapse
Rate Increase Filing Strategy and Components
Rate Increase Strategy
- Develop Strategy for Request
- Where to file
- Structure of requested increase
- Justification of requested increase
- Impact on policyholders
- Additional considerations - Policyholders Options
- RBO
- Contingent Nonforfeiture
- Cash Buyout Option - Rate Increase Dependent Assumptions
- Shock Lapse
- RBO Impact
- Adverse Selection
1. Develop Strategy for Request
▪ Factors for Insurer to Consider in Rate Increase Strategy
a. Where to file
- Many insurers develop nationwide rate increase strategy to have same rate level in all jurisdictions
▪ Some may choose not to participate in certain jurisdictions
▪ Departments may not approve full increase in each state
b. Structure of requested increase
- Magnitude of request and how to implement it
- How to implement in administrative system
- Increase can be uniform or vary by policy characteristics (benefit period, inflation protection, issue age)
- Can’t unfairly target a particular group
c. Justification for requested Increase
- Magnitude may be determined by reviewing historical and projected experience compared to assumptions (actual to expected or lifetime loss ratios)
▪ Changes in persistency, morbidity and interest can lead to high A:E ratios
- May set specific future or lifetime loss ratio or A:E ratio
- May consider different profit measures
d. Impact on Policyholders
- Management may choose to limit request due to impact on policyholders
- Can be single increase or phased-in over multiple years
▪ Single increase – easier to communicate, can be difficult adjustment for policyholders
▪ Phase-in – considered consumer friendly by regulators, policyholders can plan and budget for it, large cumulative increase is needed to have same financial impact for insurer (due to delay in implementation)
* Actuarially equivalent increase – phased-in increase that produces same lifetime loss ratio or impact as a single rate increase
e. Additional Considerations
- Rate increase requests may be limited by jurisdiction-specific laws
- Pooling – insurers may choose to combine similar policy forms for assumption setting, determining rate increase or filing rate increase request
▪ Can decrease work required by insurer – request multiple forms at the same time
▪ Can increase credibility of assumptions and experience
2. Policyholder Options
a. Reduced Benefit Option (RBO)
* To partially or fully offset rate increases
* Reduce benefit period, increase elimination period, reduce/drop inflation protection, or lower daily/monthly benefit amounts
* “Landing spots” – insurer offers spots/packages that allow policyholders to reduce benefits to a level not originally offered by the plan
- Typically target inflation protection options, but also may be for benefit periods
- Benefit reduction = amount of rate increase
b. Nonforfeiture Benefits or Contingent Benefit Upon Lapse (CBUL)
* Maintain reduced paid-up benefit if coverage lapses due to rate increase
* May be required by certain jurisdictions
* May be requested by certain departments of insurance
* Many insurers voluntarily offer this
c. Cash Buyout Option
* Recently offered by some insurers
* Cash payment to policyholder when forfeiting their policy
3. Rate Increase Dependent Assumptions
▪ Shock Lapse
* Rate of policyholders lapse as result of rate increase
* Reduce future life counts, premiums and claims
* CBUL elections may also be considered here
▪ RBO Impact
* Rate of reducing benefits due to rate increase
* Reduce future premiums and claims but not life counts
▪ Adverse Selection
* Those who remain with policy are more likely to file claims in future
* Healthy policyholders may reevaluate need for coverage at higher premium rate
* Remaining population is less healthy – modeled as increase in future claims
Components for a Rate Increase Filing
- Rate increase filing must be submitted to departments of insurance for review and approval
- Filing should consider marketing and sales, legal, governmental compliance, and operations
- Clear and consistent communication is critical - Components for a Rate Increase Filing
▪ Initial Submission
a. Cover Letter
- High level discussion of strategy and background
b. Actuarial Memorandum
- Description of affected policy forms and benefits
- Explanation of assumptions (in filing and original)
- In-depth justification of rate increase
- History of prior increases on rate block
- Distributions and summary of in-force business
- Additional info required by regulators (i.e. loss ratios, rate stability, etc)
o May also include
▪ Nationwide or jurisdiction-specific experience
▪ Comparison of Actual to Expected experience
▪ Demonstration of 58%/85% test for rate stability
- Actuarial Certification
▪ Signed by actuary
▪ States that it complies with regulations and Actuarial Standards of Practice (ASOPs)
▪ May include statement about rate stability and if future rate increases are anticipated - Be aware of Applicable ASOPs, including
▪ ASOP 8 (Regulatory Filings for Health Benefits, Accident and
Health Insurance), ASOP 18 (Long Term Care), ASOP 23 (Data Quality), ASOP 25 (Credibility), ASOP 41 (Actuarial Communication), ASOP 56 (Modeling)
c. Supplemental Information
- Jurisdictions may have special regulatory requirements or additional information
▪ Required checklists, additional experience exhibits, or further discussion of certain aspects
- System for Electronic Rates and Form Filing (SERFF)
▪ NAIC operated system for electronic rate and form filings
▪ Most filings required through this platform, including
correspondence between department and the insurer - Updated premium rate tables reflecting the requested increase to be provided when filing
Objections and Responses
a. Departments of insurance may request additional information or exhibits, ask to clarify existing info, or to adjust rate increase request
b. Requests for information and responses often made through SERFF
- Response may be directly in SERFF or a formal letter uploaded to SERFF
c. Responses should be timely, some may have due dates
d. Difficult to predict what jurisdictions will request
- Long-standing relationships between insurers and departments may help and can anticipate certain objections
e. May set up meeting or phone calls to discuss filing, ask questions, listen to concerns, or reach agreement on plan to move forward
- Open dialog can help keep filings moving and avoid confusion or miscommunication
Approval and Implementation
a. Final stage – department of insurance provides approval or disapproval
- Provided in form of a disposition
- May be transferred to a public access website for transparency with policyholders
b. Rate increase may be:
- Approved as requested
- Proposed with reduced, phased-in or restructured rate increase
- Disapproved entirely
- Reaons for Disapproval:
* Experience doesn’t justify request
* Exceeds political or non-actuarial cap
* No agreement can be reached on amount between insurer and department
* Too few policyholders in force
* Not enough time since prior rate increase
c. If reduced, Phased-in or restructured rates - insurer must provide updated premium rate tables
d. Additional conditions may be included - rate guarantees (to not have another increase for a period of time) or offering a CBUL
e. Formal communication to policyholders - usually required prior to implementation of approved rates increase
- Rate increase amount, implementation schedule, reduced benefit options, CBUL info, and likelihood of future rate increases
- Some jurisdictions require policyholder notification letters to be approved by department of insurance
f. Timely implementation is critical
- 45 or 60- day notification period usually required before rate increases
- No increase can be implemented sooner than 12 months after a prior increase
- Insurer should be prepared for customer questions or complaints with call centers and customer service
