A means for taking corrective action to accommodate the changing future is important.
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America faces a great public need in addressing long-term care (LTC) financing, and that need is growing even more critical because the population is aging. There can be substantial costs for LTC services and supports, and for elderly Americans and their families, finding ways to pay for those services and supports can be challenging. According to the U.S. Department of Health and Human Services, about half of Americans turning 65 today will need LTC; one in seven adults will need care for more than five years; and one in six will spend at least $100,000 for future LTC. 1
Private LTC insurance (LTCI) is an option for financing future LTC needs; however, it is often considered cost-prohibitive by many potential consumers. In particular, in recent years, LTC 23 , has gotten a lot of attention because of the relative size and frequency of premium rate increases. The American Academy of Actuaries’ Long-Term Care Reform Subcommittee has developed this issue brief to enhance understanding of what is leading to significant rate increases, examine how the need for a rate increase is determined, discuss the effects of increases on various stakeholders, and explore alternatives to premium rate increases.
Private LTCI is complex—a policyholder is essentially paying today for a varied range of care he or she may or may not need years, if not decades, into the future. As such, LTCI requires a long projection period, with some policyholders receiving benefits beyond age 100. Therefore even for the average issue age of 57, policy projections require assumptions for more than 50 years into the future. The future period is even longer for younger policyholders. Further, calculating premiums relies on a number of assumptions for variables such as:
Often, examining adverse experience from older policy form blocks provides valuable insights that may be applicable to newer blocks. After reviewing the adverse experience, insurers may need to change projection assumptions used for the newer policy forms. The revised projections could identify a need for a premium rate increase. It is important to note that even though adverse experience has not developed yet for a newer block, the revised expected future benefits may be higher for that newer block than previously expected. Recognizing the need to fund the higher expected future benefits for the newer block comes in the form of a premium rate increase. Actuaries will then communicate the amount of premium rate increases along with their assumed implementation timing to state insurance departments. Both the increase and its associated implementation timing are very important. Deferring implementation of a needed rate increase is detrimental because waiting to implement the rate increase will not start the accumulation of the needed increased premium to fund the higher expected benefits, resulting in the need for a further increase. The effect on consumers is that deferrals generally lead to the need for a higher rate increase than originally calculated.
When original LTCI policy forms were issued in the 1980s and ’90s, often morbidity assumptions were based upon general population statistics, and lapse and mortality assumptions upon experience of non-LTC insurance products. Not only did the insured population behave differently than the general population, but improvements in medical diagnostic practices and services, and a large increase in the use of assisted living facilities helped increase (1) the number of individuals surviving to ages where the levels of disability are higher, leading to higher claim rates per insured; and (2) the survival time following the onset of disability.
Insurers are gradually learning through their claims experience what the actual levels of benefits are and will be; nonetheless, they still do not yet have a complete basis for assessing the ultimate levels of claims to be paid at advanced ages and later policy durations, nor how these levels might change over time. Insurers will continue to use existing information to estimate these ultimate claim levels and may need to raise premium rates further as more insured life experience develops or if there are unfavorable changes in benefit usage in the future.
There are significant differences in the pricing characteristics for LTCI policies issued in the past, especially more than a decade ago, compared to policies being issued today and what is expected going forward. The possibility of a future rate increase, at any point in time, is a function of the confidence level in the underlying assumptions and risks associated with these assumptions. With more conservative assumptions, more data to support those assumptions, key assumptions approaching their absolute limits (e.g., ultimate lapse rates approaching zero), and higher explicit margins, it is likely that the probability of rate increases on the current generation of LTCI policies will be lower than the probability of rate increases on previous generations. Future changes in the underlying morbidity, mortality, policyholder behavior, provider behavior, or regulations could alter this likelihood, yet statistical analyses on the experience are helpful when applying historical results to future projections.
A recent presentation 4 of the likelihood of future rate increases on policies issued in 2014 versus policies issued in 2007 and 2000, based on a survey of insurers writing business in 2000, 2007, and 2014, found the following:
In determining whether LTCI policies require a premium rate increase, two authorized methods are applied—one for policies subject to minimum loss ratio certifications and one for a rate stability certifications.
Historically, LTCI pricing was subject to a 60 percent minimum loss ratio (MLR) by most states, meaning that the ratio of the present value of lifetime claims to premiums could not fall below 60 percent. Beginning in the early 2000s, many states enacted rate stability laws, which stated that LTCI should be priced without using the MLR approach. Instead actuaries would need to certify that the premium rates had enough margin to withstand moderately adverse experience (MAE).
Under the MLR approach, if an insurer demonstrates that revised historical and future projected experience produces a lifetime loss ratio greater than 60 percent (or the originally priced-for loss ratio), a premium rate increase could be filed that would allow the projected experience on the policies to return to that lifetime loss ratio.
Under the rate stabilization approach, a premium rate increase could be requested if actual past experience combined with projected future experience exceeds the original or previously defined MAE margin. If revised projections using updated experience exceed the MAE margin, then a premium rate increase could be filed such that the lifetime loss ratio on the original premiums is assumed to be the greater of 58 percent and the original assumed loss ratio; and the lifetime loss ratio on the increased premiums is at least 85 percent (with claims projected into the future including MAE). For this premium rate increase filing, the amount of premium rate increase needs to be large enough for the insurer’s designated actuary to certify that the premiums are sufficient with no further premium rate increases in the future unless the actual experience exceeds a revised MAE margin.
Under either approach, the need for a premium rate increase should be driven by projected lifetime loss ratios also, rather than actual past experience alone. Despite the relatively straightforward mathematical calculations to determine premium increases, determining projection assumptions (e.g., whether actual historical experience is sufficiently credible to justify changes in future projected assumptions) can be difficult.
Some assumptions have a higher degree of credibility earlier in the life of a policy than others. For example, policy lapses are more likely to occur in the earlier years of the policy, and claim submissions are more likely to occur in later policy years. As such, actual lapse experience develops a higher degree of credibility in the earlier years of the business while actual claim experience has a lower degree of credibility in the earlier years of the business.
With LTCI it can take a long time from the purchase of a policy until the first time a claim is submitted, and this time period can be several decades for many individual policies. As such, there is often little claims experience to justify premium rate increases on a relatively young group of policy forms based on the experience of those forms alone. Section 3.2.1 of Actuarial Standard of Practice No. 18, Long-Term Care Insurance, requires actuaries to use alternative data sources such as public data or experience from the insurance company’s older, similar policy forms for identifying reasonable assumptions. 6 Waiting until there is adequate claim information on each policy form could result in much larger, less affordable rate increases.
The rate increase process can vary across state jurisdictions, and can be time-consuming. While a company prepares the same initial rate increase filing in each jurisdiction, the filings are addressed differently by many states. Each state/jurisdiction approval includes unique conditions. Approvals are often for different amounts, which sometimes may not be at an adequate level as determined by the company, with different administrative implementation rules and time frames for that approval to be effective.
Larger rate increase requests may experience delays in approval within a state, and depending on the time taken in the approval process might mean the insurer does not receive approval in the year filed, and for that missed year will need to be made up in later years, in the form of an even higher premium rate for that state. Similarly, if a state approves less than the needed increase, carriers will likely request additional increases to make up for the expected shortfall. Thus, the cumulative amount of the increase could be larger than the original request in that state.
It would be necessary to develop steps to improve the filing and approval process that consider regulatory requirements found in state laws and regulations, including:
LTCI premium rate increases may not align the premiums with the future benefits as well as one might otherwise expect because individual behavior may not align with predictions. There are several reasons for this.
First, an insurer may offer an opportunity to reduce benefits in order to keep the premium dollars a policyholder pays roughly equivalent after the premium rate increase versus before (e.g., reducing the daily maximum benefit). When offered, policyholders may select benefits that better match their current/anticipated health care needs. For example, many policyholders are in the position where they have higher maximum daily benefits than actual current cost of services because the policyholders originally purchased inflation coverage 8 to meet expected inflation needs but actual inflation turned out to be lower. A policyholder who has coverage limits significantly higher than the actual cost of LTC services may reduce their daily maximum coverage such that the premiums do not change and the new maximum benefit levels continue to remain higher than the actual cost of services. Similar examples may exist for lapsing of particular riders or other benefit options.
Second, many states’ regulations require that a nonforfeiture benefit be given in lieu of lapse to those who cease paying premiums and whose cumulative premium rate increases exceed a specific percentage based on the issue age of the policyholder. The nonforfeiture benefit is a paid-up benefit with a total policy limit that equals the premiums paid to date (less any claims paid), and payable according to the benefits of the policy had it not ceased to be premium-paying upon implementation of a premium rate increase. The insurer maintains a reserve for these remaining paid-up benefits. While this remaining nonforfeiture reserve is lower, the company will have a harder time monitoring residual benefits in cases in which there is a significant reduction in policyholder contact and no incentive to report an insured’s death.
Finally, the policyholders who choose to lapse their policies or reduce their benefits may be the healthier policyholders, leaving the remaining pool of policyholders with higher average expected claims. Ideally, and to the extent the experience is credible, the morbidity experience following a premium rate increase should be compared to the morbidity of similar policies without a premium rate increase.
Insurers have routinely allowed insureds to reduce coverage by changing typical benefit options in order to help offset some or all of a rate increase. In recent years, in an effort to enable policyholders faced with a rate increase to retain significant coverage, some companies have started making available an option for policyholders to avoid the rate increase and keep their same premium by reducing the size of the future benefit increases for plans with automatic built-in inflation increases.
For example, policyholders would be able to keep their accrued benefit at their current inflation rate and only the future increases are lower than they would otherwise be. This is most effective as a conservation tool if it is done on an actuarially equivalent basis, meaning that the new prospective inflation accrual is set so that the present value of the expected reduction in benefits over time will be equal to the present value of the premium increase that is forgone. This is in contrast with most benefit reductions, which are in essence “partial surrenders” where there may be a reduction in the insurer’s liability.
When insureds reduce their benefits to help offset a rate increase, an insurer would expect some adverse selection—meaning that the healthier insureds are the ones reducing their benefits and thus the experience on the block will likely worsen over time. With the approach described above, there may be less adverse selection involved because the benefit reductions are gradual and may not become significant for many years.
In the past relatively few insureds have chosen to lapse their policies when premiums were increased and alternatives to the increase were offered. According to a 2010 report from Gen Re (a reinsurance company) based on an industry survey, lapses at the time of a rate increase were only higher than normal by 2.5 percent of the total policies exposed to an increase.9 The low 2.5 percent extra lapse rate suggests that the increases were generally affordable for the vast majority of policyholders, which is likely due to LTC insurance purchasers being in the higher income and asset demographics than non-purchasers.
Predicting future policyholder and service provider behavior can be difficult. A means for taking corrective action to accommodate the changing future is important. The more conservative assumptions in today’s pricing of private LTCI and improved speed at taking corrective action should improve future projections, resulting in fewer and smaller rate increases.
1 Long-Term Services and Supports for Older Americans: Risks and Financing Research Brief , Office of the Assistant Secretary for Planning and Evaluation; U.S. Department of Health and Human Services, February 2015.
2 Many LTCI policies include a “guaranteed renewable” contractual provision requiring an insurance company to offer to renew these policies, but the insurance company may do so with a premium rate increase only on a class basis.
3 Some states include short-term care insurance (which generally provides similar coverage to LTC, but for shorter benefit periods, typically for a year or less) under the classification of long-term care insurance. For clarity, this issue brief is not intended to address such short-term care insurance.
4 Stephen Douglas Forman, James M. Glickman, and Roger Loomis, “ LTCI New Business Pricing - How Safe Is It?, ” Society of Actuaries Annual Meeting, October 11-14, 2015.
7 The Interstate Insurance Product Regulation Compact allows member states to establish standards for long-term care insurance, among other insurance products. These insurance products are governed by the Interstate Insurance Product Regulation Commission (IIPRC) , where there is a limited ability to control rate increases through reviews of rate filing standards.
8 A popular inflation option selected by policyholders was the 5 percent option because states required LTC applicants to sign that they rejected this option, which often led to applicants selecting the 5 percent option. This inflation option turned out to be higher than actual LTC cost increases, leaving many policyholders with more coverage than needed.
