Transcript Medicare Care Management Performance Demonstration

Long Term Care Insurance:
A Lesson For All Actuaries
Middle Atlantic Actuarial Club
2008 Meeting
September 18, 2008
John Wilkin
Actuarial Research Corporation
(ARC)
1
What is Long Term Care Insurance
(LTCI)
► LTCI
pays for nursing home care or home
health care when the policyholder becomes
frail.
► LTCI is guaranteed renewable and financed
with a level premium that varies by issue
age.
2
LTCI: Elements of Health, Disability,
and Life Insurance
► Benefits
like health insurance:
 Nursing home
 Home health care
► Benefit
Trigger like disability insurance:
 Unable to perform Activities of Daily Living (which is
similar to unable to work)
 Cognitive impairment (Alzheimer’s)
► Financing
like whole life insurance
 Level premium for benefits paid near the end of life
3
How Should LTCI be Regulated?
► It
is a unique product that should have its
own regulations
► When policies were first issued in the 1980s,
there were no regulations specific to LTCI
► Based on historical development (stemming
from policies covering short-term nursing
home stays after a hospitalization), state
insurance departments applied health
insurance regulations to LTCI
4
Focus on Financing and Setting
Premiums
►
Health insurance uses the concept of a “loss ratio”
 The “loss” is the benefit payments
 The denominator is the premiums
 The concept is that premiums must not be too HIGH; they must be LOW
enough so that benefits are commensurate with premiums
 In health insurance, loss ratios are generally applied to yearly renewable
term insurance
 For LTCI, initial yearly loss ratios are low and then become very high
 In order to calculate a loss ratio that would apply over the life of the
product, the later high benefit payments are discounted by mortality,
interest, and lapse
 Thus, a high lapse rate produces a low premium
►
Life insurance uses the concept of adequate reserves
 In life insurance, the concept is that premiums must not be too LOW; they
must be HIGH enough to fund adequate reserves
5
Ramifications of a Level Premium
Used to Finance an Increasing Risk
 Initially, premiums are greater than needed to
finance current risk.
 Eventually, premiums are not sufficient to
finance current risk.
 Insurers must create an active life reserve from
excess early premiums that can be drawn down
to finance benefits later when premiums are
insufficient.
6
Active Life Reserves:
So You Thought That It Was Your
Money
► By
overpaying the initial risk, each policyholder
has a stake in the active life reserves of the
insurer
► How is this stake protected, if at all?
 What happens if the policy is terminated? Who gets the
active life reserve?
 What are the conditions under which the policy can be
terminated? Can you be forced to terminate and lose all
of your investment?
7
What happens to the Active Life
Reserve on Policy Termination?
► Four
Options:
 Profit
 Lower Initial Premium (LTCI)
 Give to continuing policyholders as dividends (a Tontine
Scheme popular until the early 1900s)
 Give back to lapsing policyholder (nonforfeiture benefit)
► For
LTCI with no nonforfeiture benefit, the only
method by which a policyholder can preserve his
stake in the active life reserves is to hold on to the
policy.
8
Release of Reserves Under LTCI
► For
the most part, LTC insurers used
estimated release of reserves from lapsing
policyholders to reduce initial premiums
 If actual lapses were greater than assumed,
then there would be more profit
 If actual lapses were less than assumed, then
premiums may have to be increased
9
Renewability Options
►
Five Renewability options:
 Cancelable
►
Can be terminated or premiums increased at anytime on selected individuals or
a class. (Auto insurance)
 Optionally Renewable
►
Can be terminated on specified date (usually renewal date) and premiums may
be increased for a class, but not on specific insureds
 Conditionally Renewable
►
Insurer can terminate only in the event of conditions stated in the contract
(usually attaining a specified age or losing employment). Premiums may be
increased on a class.
 Guaranteed Renewable
►
Requires policy renewal as long as premiums are paid, but premiums may be
increased on a class (LTCI)
 Noncancelable
►
Policy cannot be terminated as long as premiums are paid and premiums cannot
be increased (whole life insurance)
10
LTC Insurers Argued That the Right
to Increase Premiums AND the Lack
of Nonforfeiture Benefits Were
Essential
► The
risk of frailty was unknown in an
insured environment.
► The cost of adding nonforfeiture benefits
would increase the premium to unaffordable
levels.
11
Premiums By Assumed Lapse Rate
No Nonforfeiture Benefit
Lapse Rate
Premium
Percent Increase If 0%
Lapse Assumed
0%
$2,400
--
1%
$2,220
8%
2%
$2,050
17%
5%
$1,630
47%
15%
$920
161%
Note: Premiums (to the nearest $10) for 65 year old $100/day
comprehensive policy.
12
Limits On Rate Increases?
► State
regulators applied the same loss ratio test to
rate increase filings as they did to initial rate filings
– a minimum 60% loss ratio over the life of the
policy.
 This meant that the later corrective action was taken,
the greater the increase necessary to reach a 60% loss
ratio.
 This also meant that if benefits were greater than
expected (i.e., the 60% of the premium), then the 40%
“load” (for commissions, expenses, and profit) also got
the same increase.
13
LTCI Rate Increases:
Hobson’s Choice or Morton’s Fork
►
►
►
►
►
Hobson’s Choice is actually choice regarding one option –
“take it or leave it”
Morton’s Fork is a choice between two equally unpleasant
alternatives – “between a rock and a hard place”
A LTCI rate increase would be a Hobson’s Choice if you
could drop the policy with no bad consequences.
However, once you terminate, you lose all of the value of
your active life reserve and you cannot buy a policy from a
different company at a comparable rate (if you are still
insurable) because you have a higher issue age.
Therefore, a LTCI rate increase is more like a Morton’s
Fork.
14
LTCI: Who Bears the Risk?
► If
premiums can be increased and, if increased
premiums induce more lapses, where is the risk?
(Note: Much of it is on the policyholders.)
► What happens with a rate increase?
 If a policyholder continues, the increased premiums
means higher revenue.
 If the policyholder lapses, the release of reserves means
higher revenue.
 However, this could lead to a loss of good will and
reduced future sales.
15
A Booming Market
► With
little risk, over 100 companies moved into the
LTCI market in the 1990s.
► LTCI was not an easy sale.
► Competition drove (initial) premiums down and
commissions up.
 You are the actuary of company ABC. What would you
do? Producing high premiums could lead to a company
replacing you with a more cooperative actuary. An even
greater consequence is that a premium may not sell,
and that company may have to give up the LTC market
completely.
 Why low premiums and high commissions increase
sales.
16
Guidance to Pricing Actuaries
► From
1999:
the Actuarial Standards of Practice No 18 –
 Actuarial assumptions in combination should reflect the
actuary’s professional judgment of future events
affecting the incidence and cost of LTC benefits. In
setting actuarial assumptions, the actuary should
consider available experience data and reasonably
foreseeable future changes in experience over the term
of the benefit promises. Appropriate provisions for
adverse deviation should be considered.
17
ASOP LTC #18 Continued
►
Voluntary Termination (Lapse) Assumptions are critical to
the estimation of costs and to the evaluation of liabilities,
because for most plans, higher lapse rates will produce
lower expected costs. The actuary should select
appropriate lapse assumptions, taking into consideration
the method of marketing, policyholders expected to be
covered, product and premium competitiveness, premium
mode, premium payment method, nonforfeiture benefit,
and the service of the entity providing the benefits. At the
time any rate change is determined, the effect on voluntary
lapses should be considered.
18
A Period of Adjustment
► By
the late 1990s, rate increases became
fairly common.
► Policyholders reacted by bringing class
action law suits against companies that
increased rates excessively.
► Many companies sold their LTC business and
got out of the market.
19
Class Action Law Suits
► Companies
argue that their right to increase
premiums was stated in the policy.
► Policyholders argue that rate increases were
far beyond reasonable, that they would not
have bought their policies if they knew the
rate increases were coming, and that they
cannot go back to the situation at the time
they bought and select another company.
20
Actuaries In Class Actions
► Pricing
actuaries had to explain how they
arrived at their assumptions
 Actuaries need to be prepared to explain
assumption setting based on actuarial principles
and ASOPs
 Actuaries do not want to have to say “My boss
told me to lower the premiums”
21
NAIC Reforms -- 2000
► Loss
Ratios no longer required for initial
premium filings
 Insurance companies had the responsibility to
make initial premiums adequate
 Actuary must certify that premiums are
sufficient to cover anticipated costs under
“moderately adverse” experience
► Rate
increases are still possible based on a
weighted average loss ratio of 58% of initial
premium and 85% of the increase
22
NAIC Reforms – 2000 Continued
► Increases
above a specified amount require
the offer of a contingent nonforfeiture
benefit or continuation of the same
premium with reduced benefits.
► Disclosure of past rate increases to potential
buyers
23
LTCI After 2000
► Fewer
companies selling
► Initial premiums are higher and less likely to be
increased. Any increases are likely to be much
smaller.
► Lapse rate assumptions typically 2% or lower
► Still little provision for nonforfeiture benefit, even
though the additional cost is now small
 Nonforfeiture benefit can be reduced by offering after
specified policy duration (3, 4, etc.) and offering less
than asset share.
24
Life Insurance 1759: The beginning
► The
first life insurance corporation in the U.S. was
created in 1759 by the Presbyterian Synods in
Philadelphia and New York as the Corporation for
Relief of Poor and Distressed Widows and Children
of Presbyterian Ministers.
► Between 1787 and 1837 more than two dozen life
insurance companies were started, but fewer than
half a dozen survived.
► No one worried about the reserve, so it reverted
back to the insurance company.
► Thus, life insurance become one of the first
“lapse-supported” insurance products.
25
Life Insurance Growth 1840’s –
1860’s
►
►
►
►
New York Life started in 1845
Equitable Life Insurance Assurance Society started in 1859.
Its lavish expenses (including a coming out party for the
niece of company vice president James Hyde) was one of
the companies whose actions brought about the Armstrong
Commission of 1905. Later it developed a social
conscience starting a job-training program for drop outs
and investing heavily in Columbia, Maryland.
Mutual Life Insurance Company of New York started in
1843
Metropolitan Life started in 1863 (originally chartered to
insure union soldiers during the Civil War). It took the
name Metropolitan in 1868.
26
Life Insurance: 1895
►
From “Semi-Centennial History: New York Life Insurance
Company, 1845-1895”,
 “The reserve fund, created by contributions from the early
premiums and by interest, was to make up the deficiency of the
later years. When a policy was discontinued, its reserve fund was
no longer needed for the purpose for which it was accumulated;
but it was not the practice of the early companies to return this
fund to the discontinuing policy-holder. The theory required it, but
various pretexts were found for retaining it: — the company did not
agree to do it; the insured had broken his contract; those who
discontinued were the best risks, hence the mortality among those
remaining would be higher than the average; Life Insurance was
yet in its infancy, and no one could tell whether the theory was
entirely safe or not, when applied to the particular class of lives
insured.” – John A. McCall, President New York Life
27
Armstrong Commission of 1905
► Prohibited
deferred dividends and tontine policies,
requiring annual distribution of dividends
► Limited the amount of new business in a year
► Limited costs and sales commissions (eliminating
rebates)
► Increased reporting requirements to state
insurance departments
► Lessened competitive forces
28
Industrial Insurance
► Metropolitan
and Prudential (the 4th and 5th largest
companies) came out of the Armstrong Hearings
in better shape than the big three.
► Mostly because they sold industrial insurance and
paid some dividends to policyholders even though
not required to
► However, the commission did question the high
expenses and high lapse rates associated with
industrial insurance, issues that also apply to LTCI
29
The First Nonforfeiture Laws
► Elizur
Wright, Commissioner of Insurance of
Massachusetts in the 1850s, required the
conversion of the policy to a term policy
that could be bought with the reserve
reduced by 20%.
► Standard Nonforfeiture Law became
effective in 1948 – almost two centuries
after the first life insurance policy
30