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Health care costs are too high.
What health care products or services come to mind when you read that sentence? Depending on your personal experience or what stories have been highlighted in the news most recently, you might think of specialty drugs[1] or emergency room visits. These examples come readily to mind because pharmacy and medical costs are often discussed in this context. But what about the cost of long-term care insurance (LTCi)?
LTCi premiums for older policies have been increasing in recent years. Many policyholders who saw 10-20% rate increases on their policies a decade or two ago are now getting news of much larger rate increases[2]. Below, we’ll provide context for these rate increases. We’ll then discuss a potentially counter-intuitive idea: why a large one-time rate increase might be preferable to a series of smaller increases on LTCi premium rates.
Who is Getting LTCi Rate Increases, and Why?
Those who bought LTCi policies 10, 20, or 30 years ago have likely experienced rate increases on those policies. The justification for higher premiums is well-documented[3], and is related to how experience has emerged in the past decades relative to what was expected when these policies were initially priced:
- Persistency: LTCi is a lapse-supported product. This means it’s financially favorable for the insurer for people to drop their policy early, or at least before they go on claim. But people are (a) living longer and (b) hanging on to their policies longer compared to pricing expectations.
- Interest: Older blocks of policies were priced decades ago when interest rates were much higher. High interest rates were expected to provide a certain level of return on the assets held to support reserves. LTCi is pre-funded, which means much of the premium received in earlier years is invested so that it’s available to be paid out in benefits years later when the insured goes on claim. When the rate of return on investment is low, the funds might not be able to accumulate to the needed value in time to be paid out.
- Mortality: Claimants are staying on claim longer than expected, which results in higher costs to the insurer.
Whether a policyholder has received no rate increases or a high level of rate increases depends on a few factors, including the type of coverage. LTCi is sold on either a guaranteed renewable or (rarely) a noncancelable basis. Noncancelable policies are not subject to any rate changes. However, guaranteed renewable insurance policies may be subject to rate changes on a class basis. The definition of class may vary by company but generally includes factors such as issue age, policy form, and inflation protection.
Interestingly, rate increase experience can vary even for individuals within the same class. For example, Anne in Indiana might have the exact same issue age, policy form, and benefits as her friend Betty in Michigan, but their premiums could vary by 100% or more.
This type of situation is often at least partly attributable to the actions of the regulatory authority which is charged with approving an insurer’s rate increase request. Different jurisdictions have their own regulations and internal policies governing LTCi rate increase approvals, which is why some policyholders with the same class but different regulatory jurisdictions might have received dramatically different levels of rate increases.
Example from Nationwide Carrier
As one example, the cumulative rate increase approved since 2007 on a policy form administered by a large nationwide carrier varied from 10% to about 400% depending on the jurisdiction in which the form was issued[4]. Comparing two specific states with similar filing timing for this policy form, we see an interesting pattern of approvals[5]:
| 1 | 2 | 3 | 4 | 5 | 6 | Cumulative | ||
| State A | Request | 12% | 18% | 60% | 39% | 67% | 55% | |
| Approval | 12% | 18% | 20% | 20% | 20% | 20% | 174% | |
| State B | Request | 12% | 18% | 60% | – | – | – | |
| Approval | 12% | 18% | 60% | – | – | – | 111% |
Though the requests and approvals were equal at first, we see that starting after the 3rdfiling, the carrier continued requesting rate increases from State A but stopped requesting rate increases in State B. This could be because State B was “done”; it approved the full rate increase needed. State A, on the other hand, has still not fulfilled the rate increase need on the form even after 4 rounds of 20% increases. Already there is almost a 30% discrepancy in the rates between State A and State B, and that is only expected to grow as there is still a rate increase need for State A.
As indicated in the example above, when one jurisdiction approves a lower rate increase than another, higher and higher rate increases are needed to achieve actuarial equivalence between the two states. This is demonstrated in the example below.
Frequent Small Increases Can Ultimately Result in Higher Rates
As an example, consider the following series of cashflows[6]:
| Policy Year | Earned Premium | Incurred Claims | Loss Ratio |
| 1 | 100 | 5 | 5% |
| 2 | 75 | 8 | 10% |
| 3 | 56 | 11 | 20% |
| 4 | 42 | 17 | 41% |
| 5 | 332 | 26 | 82% |
| 6 | 24 | 39 | 164% |
| 7 | 18 | 59 | 330% |
| 8 | 13 | 88 | 663% |
| 9 | 10 | 133 | 1,332% |
| 10 | 8 | 201 | 2,678% |
| Present Value | 330 | 353 | 107% |
If the insurer wanted to implement a series of rate increases to achieve an 80% loss ratio, they might choose from the following actuarially equivalent options:
- One 68.4% increase in Year 3
- Two 41.0% increases in Years 3 and 5 (cumulative 98.9% increase)
- Three 34.0% increases in Years 3, 5, and 7 (cumulative 140.8% increase)
- Four 31.9% increases in Years 3, 5, 7, and 9 (cumulative 202.6% increase)
Clearly, the smaller the biannual rate increase, the higher the cumulative rate increase needed to achieve the same lifetime loss ratio. While the smaller annual rate increases are financially desirable for those who claim early (and thus typically have their premium waived), the triple-digit cumulative rate increase is disadvantageous for those who maintain their policy but claim in a later duration or not at all.
Moreover, if corrective action on the block is taken in such small steps, (whether the insurer is requesting small increases or the regulators will only approve small increases), the pricing issues will grow almost unchecked such that there could be a disastrous effect on insurer solvency.
Conclusion
Given the myriad factors affecting older long-term care blocks, rate increase needs can be very high even if the insurer is not attempting to restore the block to profitability. Regulators have a difficult tightrope to walk with respect to long-term care rate increases; they are tasked with protecting consumers while trying to avoid insurer insolvency. Often this balancing act results in a rate increase approval that is greater than 0, but somewhat less than what the insurer initially requested. There are many ways to find an appropriate balance, and regulators have been actively at work trying to find solutions to the LTC re-pricing problem[7].
Re-pricing older blocks of long-term care insurance is a messy problem. Small, frequent rate increases sound like a neat answer. However, as demonstrated above, sometimes a larger one-time rate increase is the preferred solution.
[1]Stein, R. (May 24 2019). At $2.1 Million, New Gene Therapy Is The Most Expensive Drug Ever. Retrieved from https://www.npr.org/sections/health-shots/2019/05/24/725404168/at-2-125-million-new-gene-therapy-is-the-most-expensive-drug-ever
[2]Iacurci, G. (August 9 2018). Genworth raises long-term-care insurance costs an average 58%.Retrieved from https://www.investmentnews.com/article/20180809/FREE/180809918/genworth-raises-long-term-care-insurance-costs-an-average-58.
[3]Eaton, R. (November 2016). Long-Term Care Insurance: The SOA Pricing Project. Retrieved from https://www.soa.org/globalassets/assets/files/static-pages/sections/long-term-care/ltc-pricing-project.pdf.
[4]Data compiled from the California Department of Insurance Long Term Care Rate History – Active. Retrieved from https://www.insurance.ca.gov/01-consumers/105-type/95-guides/05-health/01-ltc/rate-history-active.cfm. Accessed August 8, 2019.
[5]Data rounded to nearest 100 basis points. There were higher requests for policies with lifetime benefit periods; data is only shown for policies with limited benefit periods.
[6]Assumes mid-year cashflows and interest rate of 5.0%, with present value calculated to Time 0.
[7]NAIC LTC Pricing Subgroup. (July 2018). Long-term Care Approaches to Reviewing Premium Rate Increase Increases. Retrieved from https://www.naic.org/documents/cmte_b_ltc_price_sg_180830_ltc_rate_increases_july2018.docx
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